U.A.E. Limits Mortgages to Foreigners at 50% of Home Value

By Arif Sharif and Dana El Baltaji -
Dec 31, 2012

The United Arab Emirates plans to
restrict mortgages for foreigners to 50 percent of the
property’s value, threatening to derail a nascent recovery in
Dubai home prices after more than three years of declines.

U.A.E. citizens can get as much 70 percent of the value of
a first house and 60 percent for a second, according to
guidelines issued by the central bank and obtained by Bloomberg
News. Foreigners can get mortgages of as much as 40 percent of
the value of a second property, according to the document. The
central bank’s public relations department declined to comment
when contacted by Bloomberg News today.

“In the short term, it’s a negative because it will stop
the hike in real estate prices that we’ve seen so far,” Tariq
Qaqish, deputy head of asset management at Dubai-based Al Mal
Capital PSC, said by telephone. “Since most buyers these days
are end-users, you might see prices decline because not everyone
can afford to put in a 50 percent down payment.”

Dubai’s real estate market is showing some signs of
recovery after prices plunged 65 percent since the onset of the
global credit crisis. Dubai’s ruler in November announced
developments including a new district that includes the world’s
biggest shopping mall and a complex of five theme parks.

Tighter lending restrictions imposed by the Abu Dhabi-based
U.A.E. central bank this year may act as a brake on the rise in
home sales and prices in the second biggest Arab economy.
Foreigners make up more than 80 percent of the population of the
U.A.E., which includes Dubai and Abu Dhabi, according to
government estimates.

Stocks Fall

Real estate deals in Dubai could slump 60 percent as
“paucity of property finance deters end user from buying,”
Digvijay Singh, a Dubai-based analyst at VTB Capital Plc, said
in an e-mail today. Real estate prices could fall as much as 20
percent from current levels, declining 10 percent within six
months, he said.

‘Serious Buyers’

The central bank’s new lending restrictions “will
contribute to strengthening the property sector by encouraging
serious buyers to invest,” a spokesman for Emaar said in an e-
mailed response to questions. “Emaar has recorded strong
response to its property launches this year, and we expect the
trend to continue in 2013 by drawing on the positive growth of
the economy and growing demand for homes in premium lifestyle
communities.”

No date for implementing the new policy was given in the
circular. There were no loan-to-value limits previously some
banks lend as much as 90 percent of the property’s value.

“We will be in discussions with the central bank on the
implications of the circular for mortgage lending and the real-
estate industry and how the new rules will be implemented,”
Suvo Sarkar, the head of retail banking at Emirates NBD PJSC (EMIRATES),
the U.A.E.’s biggest bank by assets, said by phone yesterday.

Dubai, home to the world’s tallest tower, first allowed
foreigners to own property in 2002, drawing investors from Iran,
India, Pakistan and Russia. Many made quick profits by paying a
developer 10 percent of a planned property upfront and then
reselling the contract as values rose at the fastest pace in the
world. Many developers in the emirate were paralyzed when buyers
failed to make further payments to complete the properties after
the credit crisis.

End Users

After the property crash that followed, lenders and
developers focused on investors that plan to live in the homes
they purchase rather than speculative buyers.

In the long run, yesterday’s regulations will be “positive
because we’ve seen the market go back to its old habits before
the crisis, and this will help keep inflation in check,” Qaqish
at Al Mal said. “Ultimately, more end-users will be able to
afford to buy properties here and the economy will benefit.”

Property prices in Dubai have crept up this year as the
economy recovered and banks revived mortgage lending. Prices in
the emirate, the second-biggest of seven that make up the
U.A.E., were also helped by its so-called safe-haven status amid
the pro-democracy protests sweeping much of the Arab world.

Dubai Resurgence

The number of property deals in Dubai jumped 50 percent in
the first half of 2012 from a year earlier, data from the Land
Department show. The purchases, valued at 12 billion dirhams
($3.3 billion) though are still 74 percent less than the 46.5
billion dirhams of sales in the first half of 2008.

Overall real estate mortgage loans at the U.A.E.’s 51 banks
stood at 162.61 billion dirhams at the end of August, having
risen by 1.1 billion dirhams from the end of 2011, according to
data on the central bank website. In 2008, the last boom year
before the credit crisis, mortgages jumped by 69 billion
dirhams, according to central bank data.

The regulations will “affect the perception of the
property market’s recovery, that the market may not rebound as
quickly as people thought it would,” Yaser Abushaban, director
of asset management at Emirates Investment Bank, said by phone
today. “This may lead to higher yields on debt issued by these
developers and a rise in yields on their current debt.”

Yesterday’s regulations follow others from the central bank
this year. In April, it announced rules that required banks to
not lend more than 100 percent of their capital to local
governments and the same to state-related entities. Earlier this
month, the central bank postponed the implementation of the
rules that came into effect in September pending a review.

Bank lending in the U.A.E., a country with a population of
8.3 million, has risen 3 percent in the 10 months through
October.